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What Drives the Dow's Dividend Kings

These stocks have had extremely strong dividend growth. How'd they do it?

The hallmark of any successful investment is that at the end of the day, it puts more money in your pocket. Yet while paper gains on a stock can evaporate in the blink of an eye, dividend payments are yours to keep forever.

The simple fact that investors want and in some cases need their portfolios to generate solid, dependable income is what has made dividend stocks so popular in recent years. In an effort to give you some promising ideas for stocks that have not only made generous dividend payments to their shareholders but have also shown a marked ability to grow those dividends over time, let's take a closer look at some of the Dow Jones Industrials' (INDEX: ^DJI) best dividend growers over the past decade to see whether we can uncover any useful secrets in evaluating dividend stocks.

McDonald's(NYSE: MCD), 2.9% yield, 27.8% average annual dividend growth rate since 2002The company behind the Golden Arches is a cultural icon, but the company hasn't let that fact go to its head. A decade ago, McDonald's was in danger of becoming irrelevant, with a lack of innovation and a tired list of menu offerings.

But aggressive moves put an end to McDonald's malaise. It pushed strongly into the coffee market with its McCafe line, challenging even coffee-shop specialist chains on both price and quality. Meanwhile, it punched its fast-food competitors around both in the U.S. and abroad and actually benefited from the recession as cash-crunched customers came pouring in after abandoning higher-priced casual restaurants. So far, that's been the recipe for amazing dividend growth that shows few signs of slowing down anytime soon.

Intel(Nasdaq: INTC), 3% yield, 26.1% 10-year average annual dividend growthWhen you have a dominant franchise, the best thing to do is to milk it for all it's worth. That's exactly what Intel has done with its PC microprocessors, which it adapted, sped up, and modified for laptops and desktops alike over the years. Intel's rivals have tried hard but barely loosened its stranglehold on the PC industry.

Now, though, mobile devices have presented Intel with a new challenge. Although it's behind the curve compared with its competition, Intel has responded with plans to release tablets and other mobile devices using its chips this year.

To keep its stellar dividend growth going, Intel needs some success in the mobile world. If it's successful with mobile, though, the sky's the limit both for the stock and for future dividend increases.

What the bust did, though, was to force Home Depot to become more efficient, which it has done very well. With smart cost-cutting, margins have improved. And by taking advantage of the trend toward remodeling currently owned homes rather than buying new ones, Home Depot found ways to boost income even when homebuilders and mortgage banks were plunging with the housing market. If housing eventually comes back, that could put even more fuel on the fire for Home Depot's future growth.

IBM(NYSE: IBM), 1.6% yield, 18.3% 10-year average annual dividend growthHistorically, IBM was a hardware company first and foremost. But to compete in a new technology world in which hardware became more of a commodity business, IBM had to reinvent itself to avoid becoming a relic of its own past.

IBM met that challenge head-on, aiming at the high-end IT services market. So far, IBM has succeeded with flying colors, leading other big tech companies to try to imitate its model. With an ambitious five-year plan to produce continuing earnings growth, dividends should follow naturally -- and given its modest yield, those payouts have plenty of room to run in the future.

Stick with the kingsStocks that produce consistent dividend growth are extremely valuable in today's market. When you combine a prosperous business with the willingness to share profits with shareholders, you have the blueprint for fast-growing dividends -- and happy investors.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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